Pull-back 'inevitable' in emerging markets

INVESTORS should be prepared for a correction of up to 20 per cent in emerging markets this year, the world's leading expert on the sector has warned.

Dr Mark Mobius, manager of the 1.5 billion Templeton Emerging Markets Investment Trust, told The Scotsman that, with some emerging markets delivering growth of 100 per cent last year and others up by between 60 and 80 per cent, some pull-back was inevitable.

"We have already had some corrections, in Dubai, the Middle East and China, so I am reminding people not to think that these things go in a straight line," said Mobius, now 73. "We started from a very low base last year, so percentage changes can become very dramatic. Even though I think we will have a big market this year, the percentage growth cannot be as big."

His concerns derive partly from an expected surge in new issues in emerging markets that could amount to about $220bn. "That's what people want to do; there is still a question mark as to whether they will do it. It could temporarily cause problems, as it will draw money out of markets," he said.

With emerging markets' public offerings set to attract more money than those in developed markets for the first time, Mobius said the correction could be about 15 to 20 per cent, although he insisted that any slip would be part of a long-term secular bull market and not develop into a bear market.

The trust, which is up 88 per cent in the past year, invests more than 22 per cent of its assets in Brazil, with Hong Kong and China accounting for 18 per cent and India more than 11 per cent. More than half of the trust, launched in 1989, is invested in Asia, with 24 per cent in Latin America and 17 per cent in Europe.

Mobius is increasingly paying attention to the new "frontier markets". He identified Nigeria, Ukraine and Vietnam as among the countries to look out for, driven by growth in consumer spending. "Many of these countries have no banking system to speak of and people don't have banks," he said. "Many of the banks in these areas are corporate banks, but the level of demand in the consumer market could be very attractive to them."

While emerging markets remain volatile, investors remain under-exposed to the sector, he claimed. "Scots have an appreciation of international investment, but there's no question that around the world people make the mistake of sticking to their own markets," said Mobius.

"Even sophisticated institutional funds have an average of just 8 per cent in emerging markets, so they are very underweight in them. If you are looking for higher growth, you must be exposed to emerging markets."